Ryan: S&L crisis a guide for meltdown

Tim Ryan, president and chief executive officer of the Securities Industry and Financial Markets Association, is one of the few people in Washington with hands-on experience cleaning up a big financial mess.

In the wake of the savings and loan scandals, from 1989 to 1993, Ryan was a director of the Resolution Trust Corp., formed by Congress to shutter insolvent institutions, take over their assets and liquidate them.

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Politico talked with Ryan about how to deal with today’s financial meltdown — particularly how to deal with the toxic assets weighing on banks’ balance sheets, a situation that in many ways resembles the challenges faced by the government during the S&L crisis.

While many of these assets still are actually performing — people are paying their mortgages and their car loans — banks don’t know how to value the assets because there are so few transactions, Ryan said.

“Most of us who have had experience with the RTC think that the principal player here in finding the bottom — meaning finding a market clearing price for assets, mostly consumer finance assets — has got to be the government, because nobody else really has the capacity financially to do this,” Ryan said in the interview. “That’s what we thought we’d signed up for in the Trouble Asset Relief Program, TARP One. And that’s why the financial markets industry was very involved in trying to get that passed.”

But, Ryan said, former Treasury Secretary Henry Paulson and others in the Bush administration “decided to shed that part of the statute and just do injections, which we kind of always expected they would do but we thought they’d do capital injections once they knew what the hole was. And you’d know the hole once you moved the assets out.”

Here are more excerpts from the interview:

Q: They did it backwards, then?

A: They did it in reverse. We’re not beating them up because they have so many things they’re trying to do, and they’re trying to do it at record speed with no playbook. I would much rather have in this area fast action rather than procrastination because you can’t decide.

Now they’ve done the capital injections. The financial system has stabilized. We’re not worried about people running in to get money out of their banks. People feel more comfortable about the banking system — at least they should. But now we’re in a terrible economy, and we hope that they’ll use the next piece of TARP to deal with the troubled asset issue, and do it in a logical fashion.

Q: There’s about $350 billion left in TARP. Is that enough?

A: To give you a sense, on the S&L cleanup, we closed 700 institutions. We took in, I don’t know, $500 billion of assets. We sold them off. We did it all in three or four years. We lost about $140 billion at the end. So, the idea that $350 billion is not enough to do something very meaningful now just doesn’t make any sense to me. It’s a huge amount of money. It’s just a matter of targeting, and how do you use it.

The government is already getting some leverage from TARP money by insuring assets for Bank of America and Citigroup. So, they can basically insure a $300 billion portfolio with $30 billion. The downside to the insurance program is that the assets do not move off the balance sheet, nor do we have a sale. So, we don’t know what the true value is.

What they also need to do is marry the insurance piece with a sale program where the government is totally transparent about what they’re paying and why they’re paying it. Right now, they need to figure out a way to buy assets.